Everyone agrees that government-backed mortgage agencies Fannie Mae and Freddie Mac are in big trouble, with bailout costs estimated as high as $1 trillion.
The solution, says Pimco’s star bond fund manager Bill Gross: nationalize them.
Fannie, Freddie and the other government-backed mortgage agencies should be merged into one entity called the Government National Mortgage Association, he wrote in his monthly commentary on Pimco’s website.
"Taxpayers would be protected through tight regulation, adequate down payments and an insurance fund bolstered by a 50- to 75-basis-point fee attached to each and every mortgage," Gross wrote. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)
"After all Fannie and Freddie had really blown up because of the private/public nature of their charter, which incentivized execs and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong."
Nationalization would stop all that, wiping out practices such as liar loans and no-document mortgages, Gross says.
The private sector simply can’t handle housing by itself, he argues. "The cost would be enormous in terms of yield – 300 to 400 basis points, crippling any hopes of a housing-led revival to the economy."
Ex-Federal Reserve Chairman Paul Volcker sees things a bit differently.
While he agrees with Gross that the mortgage market must be restructured, Volcker doesn’t think the government should play a central role.
“Not much exists (now) without the government running it. I don’t think that’s what we want,” he told Smart Money.
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